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TUPE transfer ruling may make it easier to buy assets from a company in administration

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8 January 2009

As a result of an important Employment Appeal Tribunal (EAT) ruling buyers can, in certain circumstances, take on assets from a business in administration without employees transferring to the buyer. This goes against previous Government advice that the Transfer of Undertakings (Protection of Employees) Regulations 2006 (TUPE) always applied to transfer employment contracts in transfers made in the context of administration.

TUPE Regulations

The TUPE Regulations themselves do not comprehensively define which type of insolvency procedures fall within TUPE and which do not, so ultimately it is for the tribunal and courts to decide. Regulation 8(7) provides that employees do not transfer under TUPE where "the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of an insolvency practitioner".

Previous Government advice

According to previous guidance published by the Department for Business, Enterprise and Regulatory Reform (BERR), the main purpose of administration is not to realise assets for the creditors and so the process is not "analogous" to bankruptcy so employees would transfer under TUPE.

EAT ruling

In Oakland v Wellswood (Yorkshire) Ltd assets were transferred by a company in administration by way of a pre-pack administration business sale, i.e. a sale all but agreed before the administrator was appointed, to a wholly owned subsidiary set up by one of its major suppliers. An employee and co-director of the original company claimed unfair dismissal. Contradicting the BERR advice, the EAT held that the administration was in fact conducted with a view to the liquidation of assets and therefore the claimant did not transfer under TUPE and the EAT rejected the employees appeal.

The EAT looked at the joint administrators report. The EAT agreed that TUPE would protect employees where administrators continued to trade with a view to selling the business as a going concern, but in this case the administrators had soon reached the conclusion that due to its weak financial situation the business could not be saved and they took steps to sell the assets immediately following their appointment. Based on the facts, the Tribunal had been entitled to conclude that the appointment of the administrators was with a view to the eventual liquidation of the assets by way of a creditors voluntary liquidation. This approach, said the EAT, was in line with the rescue culture policy behind the legislation, whereby a purchaser should not be put off by the effects of TUPE protection. As a result, at least some jobs were saved and the creditors benefited from the best option.

The decision is to be welcomed in the current climate as it reflects the fact that in many cases administration is a prelude to winding up in order to secure a better result for creditors. Where it is obvious at the outset that rescue is not a viable prospect, this ruling should make it easier to sell a business, as clearly the opportunity will be more attractive to a buyer if it is able to leave employment liabilities behind. However, where rescue appears to be at least a possibility at the outset, buyers would still need to assess and provide for potential liability for employment claims

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Share options granted under the Enterprise Management Incentive Scheme (usually referred to as EMI options) are a popular choice for SME and start-up companies who want to reward and incentivise employees in alternative ways to simply paying them more amounts of cash.

Where a start-up or SME company is looking for external investment, and one or more individuals are looking for investment opportunities which can provide significant tax advantages, it is well worth considering the Enterprise Investment Scheme (“EIS”) or the Seed Enterprise Investment Scheme (“SEIS”).

The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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